Greek referendum may be off the table

Prime Minister George Papandreou took a step back from the ledge today. The Prime Minister apparently has decided to scrap the referendum that had put last week’s euro debt deal in jeopardy if the opposition New Democracy Party agreed to back the debt deal in Parliament.

I say apparently because the Prime Minister’s office has denied that Papandreou had told Reuters and other news organizations that he had abandoned plans for a referendum. The Prime Minister is currently speaking to a meeting of his own party but as of 12:15 New York time hasn’t yet said anything concrete about the referendum.

Thinking is that Papandreou who faces a confidence vote on Friday is looking to form some kind of national unity government with New Democracy. Before his call for the referendum Papandreou’s Pasok Party controlled just 153 seats in the 300-member body and that slim majority has slipped in recent days as members of his own party have voiced opposition to the referendum plan.

Factoring into Papandreou’s decision is a tough session yesterday with German Chancellor Angela Merkel and French President Nicolas Sarkozy. The two leaders made it clear to the Greek Prime Minister that they would regard any referendum on the debt deal as a referendum on whether Greece would stay in the euro. And that absent a vote from the Greek government to approve the debt deal Greece should not expect to receive the $11 billion it needs in November to pay pensions and government salaries or the $7 billion it needs in December to meet interest payments on its debt to avoid a default.

That talk may have convinced Papandreou that the risk of going to a referendum in an effort to save his government was just too high. While the debt deal is deeply unpopular in Greece, polls show that 70% of Greeks want to stay in the euro. Any politician that got Greece kicked out of the euro would seem to have a very dark future indeed.

I’d expect global stock markets to move up on any news that the referendum had been scrapped. But I’d also expect that relief to give way fairly quickly to worries about whether Greece and form a government to approve the debt deal and a return to concerns about the lack of crucial detail in the debt deal itself.